Cranswick: Preliminary Results 2022

On the 24th of May, Cranswick plc announced its audited preliminary results for the 52 weeks ended the 26th of March 2022.

Revenue increased by 5.8%, while ROCE was 16.9% (lower than the previous year in which it was 17.2%).

What I like about Cranswick is the steady growth it has achieved over long periods. The compounded average growth of revenue since 2005 is around 11%, and it achieved it with all the years growing except one (2019).

The ROCE does not seem typical of a commodity business. And it is in a defensive and strategic sector. In fact, we see that it was able to maintain its growth even in this challenging macro-environment as it did during the pandemic.

Shareholders also benefit from this growth. With the announcement of increasing the dividend by 8% this year, it will achieve 32 years in a row of increases.

 

Cranswick's Growth

 

What is the strategy of Cranswick?

Cranswick targets its growth in two different directions. On one side, it is widening its offer. Poultry production revenue is now 20% of total sales, with an increase of 30% during last year. Apart from that, two of the three acquisitions during the previous year were in Mediterranean products, diversifying its offer further.

On the other side, it aims a vertical integration to control the total supply chain better. The third acquisition, in the Pet foods sector, will also help this aim.

 

What is the Intrinsic Value of Cranswick?

It isn’t easy to put the quality of a company into numbers, especially when it also grows and still has future opportunities in the same sector.

To reflect these key factors, we could either use a higher multiple or increase the expected cash flows in the future.

In my case, and just for rough estimation, I assume that within 3-5 years, it will get an EBIT of GBP160 million. With a multiple of 15, we get GBP 2,400 million, which, divided by the number of shares (53.21 million), gives us a target price of GBp4,510.

Citi Trends: Q1 2022

What were the last Citi Trends results?

On May 24th, Citi Trends published a press release with the results for its first quarter of 2022. In it, they confirmed their previous guidance, disclosing a decrease of revenue of 27% versus the first quarter of 2021. Comparable store sales were also down 29.2%, as well as the rest of the primary metrics.

As with the rest of the retailers, the macro environment, especially the high inflation, hurts sales. In addition to that, the strength of last year’s first quarter, with significant stimulus in the US, does not help. In fact, total sales grew 1.6% if we compare them to the first quarter of 2019 (before the pandemic).

It is true that inflation, especially in food and energy, is hurting more Citi Trends’ target customers, and it probably will go on doing it in the following months. But, even though Citi Trends is still profitable. So it is not clear if, at these market prices, it deserves such a high amount of short interest (39.4%).

What is the intrinsic value of Citi Trends?

In terms of outlook, the Management expects to finish the year with a range of total sales of $860-$880 million and an adjusted operating income of $23.8-$30.6 million.

With a midpoint of operating income of $27.2 million, if we use a multiple of 10, add the current net cash ($61.66 million) and divide it by the number of shares (8.44 million), we get a target price of $39.5, which would give us a potential revaluation of around 33% from the current price ($29.76).

What is the Citi Trends Capital Allocation?

A catalyst that can make Citi Trends close the gap with its value is the repurchase of shares it is currently doing.

During the first quarter of 2022, Citi Trends repurchased 170,000 shares at a total cost of $5.3 million. That makes an average price of $31, which we could consider a reasonable price from the Management perspective.

But at $29,76, and considering that they still have an approved amount of $54.7 million for this purpose, they could repurchase around 20% of the current market capitalization.

This repurchase of shares could create a short squeeze that catapults even higher its shares’ price.

 

Cows: The best hedge against inflation

Last week I read an article in The Economist that caught my attention. Given the known issue with inflation in Zimbabwe, a businessman there has created a company that allows investing in cows in order to get a pension in the future.

I found it relevant because, if in anything Zimbabwe is among the top, is in inflation. So they must know a little bit about this current environment that we are living.

The most relevant characteristic of this initiative is that at the time of getting the investment back, investors can choose whether to get their assigned amount in cash or in cows. In the end, investing in cows is not different than investing in other real assets. In western markets, we can similarly buy stocks of public companies which raise livestock and it wouldn’t be so different. But being able to cash them in cows makes this investment independent of short-term fluctuations in the market (in this case in the cows’ prices).

In any case, what really reaffirms to me is that the best way to hedge our savings against inflation is to invest in real assets. Assets that produce some benefit and are revaluated on time, especially if inflation is high.

CARS.COM: The Car Dealers Marketplace

Cars.com is basically an online marketplace that connects car buyers and sellers. It was founded in 1998 and is based in Chicago.

Their main customers are local dealers. According to the last quarterly results report released on May 6th, they account for approximately 88.7% of total revenue.

An old adage about brick-and-mortar business says the three most important factors are location, location, and location. We should replace them with traffic, traffic, and traffic in online businesses. Of course, there are other important factors. But usually, the revenue correlates to the number of visitors to a shop. And if these visits don’t require a significant expense in advertising, the business can have a big competitive advantage.

I think the best moat or competitive advantage of cars.com is being able to attract so much organic online traffic. This traffic usually comes from results from search engines. In Ahrefs, we can check through which keywords a potential buyer has searched and how each website ranks or in which position it appears in the search results. If we see the main keywords through which most users arrive at the cars.com website, we get this list:

Ahrefs cars.com

As we can see, cars.com ranks first in promising searches. It is not only necessary it brings traffic to the site but also its quality. Somebody searching “cars for sale” is likely to be thinking about buying a car, so it is definitively the correct lead for a dealer.

Cars.com is aware of this, and they are even offering additional services to the dealers, such as the use of promotional videos for these visits with the FUEL program. You can check how it works in the site fuel.cars.

 

As long as cars.com can maintain this position in the search results and these visits numbers, it will bring value to the dealers and continue achieving the constant free cash flows they have been getting in the last years.

 

Risks

The main risk I can find in this business, or at least the big drawback, is growth. Currently, cars.com is selling its services to around 19,500 dealers. In the call commenting on last quarter’s results, the CEO said they still have room to grow in 40,000 dealers.

Indeed this would imply multiplying by three the current number of customers and potentially the revenue. But looking to the long term, even talking as we are about a small company (around $680 million), we cannot expect a multi-bagger if they stick to the current business. Of course, they can expand geographically or to other adjacent businesses in the future.

Their current strategy of combining the increase in their customer base with adding more services to them, like the recent purchase of Accu-Trade (for valuating vehicles) or CreditIQ (for offering loans), makes a lot of sense. As more services are used from cars.com, the switching costs to another platform will be higher. In addition, to attract new dealers, they also increase the loyalty of their existing ones.

 

 

Capital Allocation

Due to the high free cash flow that the company generates, cars.com is in an excellent position to reinvest in its business, buying adjacent services providers as commented or returning capital to shareholders through buybacks.

In fact, they have in place a repurchase program to acquire $200 million in shares. At the current market price, this amount represents almost a 30% of the company. During the first quarter of 2022, they have repurchased 0.3 million at an average price of $14.78 (currently is trading at $9.8).

Finally, it is also a good signal that some of the company officers have been recently buying shares for $9.85.

 

Sonos: Update of Q2 2022

Sonos Inc designs, develops, manufactures, and sells audio products and services. It distributes its products in over 50 countries.

Last May 11th, it presented its results for its second quarter of 2022 (which ended on April 2nd; the start of its fiscal year is at the end of September). They disclose an increase in revenue of more than 20% year-over-year and a bit of tension in the margins due mainly to the rise in the price of some components. The growth was driven by solid demand for their products and supply availability during this quarter. But even though they still have ended the quarter with a backlog pending to fulfill.

COVID-19 is still delaying the availability of products, which can be holding up additional sales. Moreover, it is causing an increase in component, shipping, and logistics costs, as well as longer lead times (due mainly to new lockdowns in China). The pandemic has also delayed their planned move to Malaysia to diversify the supply chain.

The conflict between Russia and Ukraine has caused further disruptions, but it didn’t have a material impact on their supply chain.

Sonos speakers revenue represented 79.5% of total revenue. It grew 18.8% year over year, driven by the introduction of Roam in April 2021.

Talking about capital allocation, they have repurchased shares for a value of $74.5 million for the first half of the year.

Call

In the call commenting on these results, Patrick Spence, CEO of Sonos, made the following remarks:

  • The 20% year-over-year revenue growth is even more impressive if we consider that it is being compared with a 90% year-over-year growth last year and was constrained by supply.
  • He announced three innovations.
    • Ray: the new compact soundbar with new acoustic innovations that deliver balanced sound, crisp dialogue, and solid base
    • Sonos voice control: the first voice experience purpose-built for listening and controlling your music on Sonos
    • Sonos Roam: the ultra-portable smart speaker
  • They confirm that the demand for their products is strong regarding the macro environment. And it was even before the stimulus last year.

Outlook

  • They reconfirm their revenue guidance of $1.95-$2 billion for 2022 (continued 20-27% growth during the second half of the year). Based on three reasons:
    • Consumer demand signals from Q2 (offset by supply constraints)
    • Strong new product introductions
    • Pricing actions taken last September
  • Lower gross margin due to the increase in costs: 45.5-46% for the remainder of the year
  • Adjusted EBITDA in the range $290-$310 million (-2.5%)
    • Adjusted EBITDA margin in the range of 14.9-15.5%.

My takeaway

  • Currently, Sonos has 11.73% in short interest.
    • I don’t think these shorts expectations are specific to this company. Most public companies in the US discretionary consumer sector are bearing short positions.
  • It seems probable that there will be some decrease in the demand. The big question is if the market is already discounting it or if it will be more than what is discounted.

Is Sonos undervalued?

Challenging to know in the short term, but based on its long-term goals for 2024:

FY2024 Financial Targets  -$2.5B  Gross Margin  45-47%  Adjusted EBITDA Margin  15-18%

They would get an EBITDA of $412.5 million. With a conservative multiple of 10 (given the potential growth of this company), we would get an Enterprise Value of $4,125 million.

If we add the estimated net cash by analysts for that year ($1,170 million), we get an estimated value of $5,295 million. Which, divided by the number of diluted shares (139.64), gives us a share target price of $37.9.

From the current price of $19.97, this would give us a potential gain of 89.8% in two years.